Economics Journal: Don’t Blame the Farmers for Wanting a Fair Deal

Who today in India is making the most vociferous case to let the markets function and for the government to play facilitator rather than bully?

I’d argue it’s not any bureaucrat, policy wonk or columnist in Delhi, but a group of farmers protesting in nearby Uttar Pradesh against their government’s approach to land acquisition for the Yamuna Expressway project. The project, when completed, will create a six-lane, 165-kilometer freeway that will cut travel time from New Delhi to Agra to two hours from at least four. Last week, as protests flared, at least four people, including two policemen, died in the violence.

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This is the next chapter in an ongoing saga, punctuated by the arrest of Rahul Gandhi, a Member of Parliament and office bearer of the Indian National Congress who last year had promised to be the farmers’ “soldier in Delhi”. Mr. Gandhi has been released on bail.

Last September, in the wake of violent protests over the same project, the Uttar Pradesh Chief Minister Mayawati announced a new land acquisition policy which would raise the amount per square meter each farmer would receive, although crucially this would remain set by the government.

So what do the farmers want and does it make sense? And can their actions be construed as anti-development?

Unlike in some other disputes such as the Vedanta bauxite mining project in Orissa that the government rejected, the issue here is not principally about farmers or tribals not wanting to sell their land. The farmers’ objection is that the government’s approach of fixing the price grossly undervalues their land, which will presumably jump exponentially in value when converted from agricultural to commercial use.

Far from being anti-development, the U.P. farmers’ position makes good economic sense in at least two ways.

First, the farmers are right that it’s arbitrary and unfair for the government to stipulate a fixed price per hectare of land in advance of negotiations. In a normal market with many buyers and many sellers and a homogenous good, the price is determined where demand equals supply. But in this situation, the land only attains its full value after the sale is consummated and the property developed.

In a market-based land acquisition scenario, striking a deal is much closer to what economists call “bilateral bargaining,” where two parties are haggling and the final terms reflect each side’s relative bargaining power. But in the U.P. case, for the government or anyone else to set a fixed price in advance of negotiations between the two principal parties short circuits this normal bargaining process and prevents the market from functioning. Hence the farmers’ dissatisfaction.

In this light, the farmers’ agitation can be understood not as obstructing a development project but, by ratcheting up the pressure, turning the bargain in their favor. Even claiming that they would refuse to sell their land at any price, as a few farmers have said, is a great bargaining strategy. It’s no different from a labor union threatening to go on strike to get a better wage from an employer.

Second, those farmers who favor direct negotiation with developers as the most efficient way of reaching a deal also have sound economics on their side. This approach would cut out the middleman, in this case the state government. Under the current U.P. program, the government pays a low price to the farmers, charges a high price to the developers, and thereby extracts most of the gravy, to say nothing of creating opportunities for corruption.

The farmers’ belief in their own savvy as negotiators would seem to belie the commonly heard argument that the government needs to be involved to prevent them from being exploited or intimidated by large private-sector players. Rather, the current system, led by the government, seems to be fleecing the farmers.

The current system would also seem to work more in favor of the developers than the farmers because it’s simpler to deal with one actor, the government, than negotiate individually with small groups. In economic terms, it solves the coordination problem of one buyer having to negotiate individually with many sellers but does so by transferring most of the gains to the government at the expense of both parties. The developers, too, should therefore prefer negotiating directly with a group of farmers.

Here’s the dilemma. If the government stays out, it’s possible that small sellers will fail to coordinate in negotiating with the large buyer, which may result in the deal falling through or of the small seller getting ripped off. But if the government acts as broker and uses its coercive power to force a deal, farmers also could get the short end of the stick.

In practice, there will be ongoing and messy three-way negotiations, with the government involved whether anyone likes it or not. Some politicians will find it expedient to side with the farmers, who in turn have an interest in publicizing their cause. The issue has already become highly politicized, with so far more heat than light, and little of concrete benefit for the farmers.

The ideal solution would therefore involve the government acting purely as facilitator and coordinator between buyers and sellers, rather than its current role as rent extractor and price-setter. A suitably crafted land acquisition bill, or an interim ordinance, could achieve this, and ensure that the bulk of the gains accrue to the buyers and sellers, not the government. Transparent rules of the game are key as they create trust among all parties that the final outcome is fair. We need to end the License Raj in land acquisition.

The bottom line is that there’s nothing irrational about what the farmers in U.P. are doing and no inherent challenge to India’s development model. Our desire to have a fast route from Delhi to Agra has to be weighed against appropriate compensation for the farmers who’re going to lose their land and livelihood.

It’s not a question of growth versus equity, but growth with equity. Our farmers seem to understand that better than our politicians and policy wonks. They just want a piece of the action, like we all do.

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